The following was posted on the Rolling Stone website. Pretty funny to see some of the power taken away from the record companies.

Wal-Mart Wants $10 CDs

Biggest U.S. record retailer battles record labels over prices

Wal-mart wants every CD you buy to cost less than ten bucks. And the nation's largest retailer -- which moved a quarter of a trillion dollars' worth of goods last year -- usually gets its way. Suppliers who don't accede to Wal-Mart's "everyday low price" mantra often find their products bounced from the chain's stores, excluded from being sold to the 138 million people who shop at a Wal-Mart store every week.
In the past decade, Wal-Mart has quietly emerged as the nation's biggest record store. Wal-Mart now sells an estimated one out of every five major-label albums. It has so much power, industry insiders say, that what it chooses to stock can basically determine what becomes a hit. "If you don't have a Wal-Mart account, you probably won't have a major pop artist," says one label executive.

Along with other giant retailers such as Best Buy and Target, Wal-Mart willingly loses money selling CDs for less than $10 (they buy most hit CDs from distributors for around $12). These companies use bargain CDs to lure consumers to the store, hoping they might also grab a boombox or a DVD player while checking out the music deals.

Less-expensive CDs are something consumers have been demanding for years. But here's the hitch: Wal-Mart is tired of losing money on cheap CDs. It wants to keep selling them for less than $10 -- $9.72, to be exact -- but it wants the record industry to lower the prices at which it purchases them. Last winter, Wal-Mart asked the industry to supply it with choice albums -- from new releases from alternative rockers the Killers to perennial classics such as Beatles 1 -- at favorable prices. According to music-industry sources, Wal-Mart executives hinted that they could reduce Wal-Mart's CD stock and replace it with more lucrative DVDs and video games.

"This wasn't framed as a gentle negotiation," says one label rep. "It's a line in the sand -- you don't do this, then the threat is this." (Wal-Mart denies these claims.) As a result, all of the major labels agreed to supply some popular albums to Wal-Mart's $9.72 program. "We're in such a competitive world, and you can't reach consumers if you're not in Wal-Mart," admits another label executive.

Tensions are not as high now as they were last winter, but making sure Wal-Mart is happy remains one of the music industry's major priorities. That's because if Wal-Mart cut back on music, industry sales would suffer severely -- though Wal-Mart's shareholders would barely bat an eye. While Wal-Mart represents nearly twenty percent of major-label music sales, music represents only about two percent of Wal-Mart's total sales. "If they got out of selling music, it would mean nothing to them," says another label executive. "This keeps me awake at night."

Wal-Mart would not directly comment on tensions with the labels, but Gary Severson, Wal-Mart's senior vice president and general merchandise manager in charge of the chain's entertainment section, did allude to the dispute about music prices. "The labels price things based on what they believe they can get -- a pricing philosophy a lot of industries have," he says. "But we like to price things as cheaply as we possibly can, rather than charge as much as we can get. It's a big difference in philosophy, and we try to help other people see that." Virtually no industry executives would publicly comment about their company's relationship with Wal-Mart. But off the record, many record-industry executives shared their concerns. "I don't think there is a music supplier in America who really enjoys doing business with Wal-Mart," says one major-label rep.

No one in the music business ever expected Wal-Mart to become the most powerful force in record retailing. In the past, the business was shared among smaller local and regional chains such as Musicland, which once had an estimated ten percent of the market. But as Wal-Mart and other national discount operations such as Target and Best Buy have grown -- approximately half of all major-label music is sold through these three -- an estimated 1,200 record stores have closed in the past two years, according to market-research firm Almighty Institute of Music Retail. Last February, Tower Records, with ninety-three stores, declared bankruptcy and is now up for sale; Musicland has already changed owners, with many local outposts shuttered.

Wal-Mart is like no traditional record seller. Unlike a typical Tower store, which stocks 60,000 titles, an average Wal-Mart carries about 5,000 CDs. That leaves little room on the shelf for developing artists or independent labels. There's also scant space for catalog albums, which now represent about forty percent of all sales. At a Wal-Mart Supercenter in Thorton, Colorado, for example, there were no copies of the Rolling Stones' Exile on Main Street or Nirvana's Nevermind. While most of the latest hits were priced at $13.88, some records -- from the O Brother, Where Art Thou? soundtrack to the latest by Yellowcard -- were displayed for $9.72. Says Severson, "Paying fifteen dollars for a piece of music is a difficult value equation for customers."

For the music industry, having such a dominant retailer is like being stuck in a bad marriage. Whereas traditional music retailers took advertising money from the labels to push new releases in Sunday newspaper circulars, Wal-Mart barely advertises locally. It relies on national campaigns, where it promotes its own low-price policy. "Wal-Mart has no long-term care for an individual artist or marketing plan, unlike the specialty stores, which were a real business partner," says one former distribution executive. "At Wal-Mart, we're a commodity and have to fight for shelf space like Colgate fights for shelf space."

In the same way that Wal-Mart made it difficult for local mom-and-pop retailers to compete with its low prices, it has hurt smaller music stores. "When you're buying CDs for twelve dollars and selling them for ten like Wal-Mart, it makes the rest of us look like we're gouging the customer, when we're not," says Don Van Cleave, head of the Coalition for Independent Music Stores, a retail consortium. "It's supertough to compete with that price point." Even online, Wal-Mart sells songs for eighty-eight cents, compared with ninety-nine cents at the market leader, Apple iTunes Music Store.

Getting Wal-Mart excited about carrying a record is at the top of every label's to-do list, but it's harder than it sounds. There is an immense cultural chasm between slick industry executives and Severson's team of three music buyers at Wal-Mart headquarters in Bentonville, Arkansas. Only one of the three had ever worked in music retailing -- until that person moved to a new division in August and was replaced by someone who previously bought Wal-Mart's salty snacks. (Wal-Mart also relies on buyers at its two distribution companies, Handleman and Anderson Merchandisers, who purchase records as well as stock the Wal-Mart stores.)

"Content-wise, Wal-Mart is limited about what they sell," says one label chieftain. "Wal-Mart is Middle America's shopping headquarters, with different buying habits and consumer tastes than those who live in Manhattan and L.A." When founder Sam Walton christened the first Wal-Mart in 1962, music was never a priority -- it wasn't an everyday, easy-to-stock product like light bulbs, since the Top Ten changed so much. The chain also had specific objections to music. Walton wanted all stores to remain family-friendly, and in the rural South, rock & roll had the potential to turn away many customers. In 1986, the Rev. Jimmy Swaggart led one such campaign to ban music from Wal-Mart, saying rock fostered "adultery, alcoholism, drug abuse, necrophilia, bestiality and you name it." Albums and magazines about rock (including Rolling Stone) were temporarily pulled from the Wal-Mart shelves.

Wal-Mart's wariness about music ended once the music industry adopted a voluntary advisory sticker on albums deemed to contain adult language or sexual content. Today, before any new album is released, someone at each label is charged with asking, "Do we have any Wal-Mart issues?" If an advisory sticker is placed on an album, the label will put out a clean version about ninety percent of the time. Since the edited version of a hit record usually averages only about ten percent of a record's total sales, they do it mostly to keep Wal-Mart happy.

Wal-Mart has loosened up a bit, too. Eminem's albums, stickered or not, are not carried by the chain, but it does sell the 8 Mile soundtrack. And it carries an edited version of 50 Cent's debut. Since the labels are so adept at self-policing, though, censorship controversies are now rare. "There have been examples in the past, but it's not a current issue," says Severson.

Wal-Mart has also urged the labels to create exclusive new products that would lower music prices. In a short-lived test, Universal excerpted seven songs from existing albums by acts such as Sum 41 and Ashanti and sold them at Wal-Mart for $7. Few other labels wanted to participate. "They proposed it to a bunch of artists and managers, but everyone was worried that we are sending a message that instead of the sixteen-track album we sold, those nine extra songs were filler," says a label executive.

Some record executives think they can survive Wal-Mart's push. They argue that the hottest acts will always command a premium price. "50 Cent sold 7 million copies," says one rep, "and I guarantee that many of those sold for fifteen, sixteen dollars." And they believe that Wal-Mart will want to carry those hits because they draw customers. "If they can't find a record at Wal-Mart, people will go elsewhere," says one executive. "We should play hardball." But each label is watching the others to see if any make major concessions to Wal-Mart's demands for lower prices. A label that gives in could gain shelf space at the expense of another. "If you lose an account, one of your rivals could get more product in the store and get one up on everyone else," says a major-label rep. "You have to tread cautiously."

The tug of war between the labels and Wal-Mart isn't going away soon. The chain is aggressively opening new stores -- fifty-seven in October -- including some in urban areas. So unless it makes good on its threat to cut back on its music section, it will continue to grow as the top record store and become even more powerful. Laments one industry rep, "There is some impending doom associated with us not helping them."

Price War: Does a CD have to cost $15.99?

Major labels insist that the low prices mass retailers such as Wal-Mart and Best Buy demand are impossible for them to achieve. But Best Buy senior vice president Gary Arnold counters, "The record industry needs to refine their business models, because the consumer is the ultimate arbitrator. And the consumer feels music isn't properly priced." Labels point to roster cuts and layoffs as evidence that they can't sell CDs cheaper.

This breakdown of the cost of a typical major-label release by the independent market-research firm Almighty Institute of Music Retail shows where the money goes for a new album with a list price of $15.99.

Very interesting. I think Wal-Mart is in the right. Most consumers are aware that the consumer is still being gouged. I agree. "retail overhead?" "label overhead?" I think these terms hide the $7 profit off that nickel CD. Marketing? I bet only the top 10% of artists get promoted. So they want to spend $10 billion dollars advertising Britney's or Eminem's latest? Fine tack on a $3 marketing fee for each CD. Leave the rest of us alone that don't listen to top 40 crap.

Funny how the "major label rep" says they should play hardball because basically 50 cent draws people to Wal-Mart. Riiiight. Like mentioned music is only 2% of Wal-Mart's income. They wouldn't bat an eyelash over some flash in the pan 15 minutes of fame rap artist.

lastly who buys that edited crap anyway? What is wrong with people. I haven't bought a CD there in a decade.

as much as i hate to say it, i gotta side with the record labels on this one. while i realize they are probably gouging the consumer (i say 'probably' because only the record companies know exactly how much it costs to produce and distribute each and every cd) the record labels shouldn't have to bow to a giant company just because "they are sick of losing money." the article itself says music sales account for about 2% of walmart's total sales. when your total sales are measured in the billions, that 2% is virtually meaningless. walmart is just being greedy, as if a quarter trillion dollars a year isn't enough.

i think the reason walmart has become such a music powerhouse is the fact that A. they operate so many stores, stores in places where other retailers wouldn't dream of setting up shop. there may not be a record store in a 30-40 mile radius around some walmarts so if johnny wants a cd bad enough, hes going to buy it at walmart. B. a lot of families shop at walmart and parents know that they can get edited cds for their kids. i don't know if i've ever bought a cd at walmart, mainly because of their clean cd policy, but i'm sure a lot of parents do shop for cds there, moreso for the edited cds than the price.

don't get me wrong, the record companies aren't so squeaky clean either but if walmart wants cheaper music then they should go to the record labels and say "it doesn't cost $xx.xx to produce and distribute this cd and we have proof. you're gouging us." but they aren't. they're just saying "we want even more money and you have no choice but to comply."

capitalism at its worst/finest.

by the way, cdollaz, thanks for the article. i probably wouldn't have come across it otherwise.

Originally posted by fashionvictim86 I find it odd that Wal Mart won't sell Green Day's American Idiot, yet they will sell Korn and Eminem CDs.

does a clean version of American Idiot exsist? walmart doesn't sell Eminem cds on principle, even if an edited version exsists...if a clean version of AI exsists they likely refuse to sell it for a similar reason.

i love you walmart, whip the RIAA into shape. although i wont buy CDs from walmart due to them being censored, this strong arming could help change the bullcrap pricing that has been going on for years. if walmart is selling CDs for 10 bucks, the other stores will have to competively price or lose all their business. therefore walmarts plan should drop prices across the board.

if all CDs were $9.72 or less, i would literally buy 500% more than i do now. i havent bought more than 5 CDs a year since the early 90s. the price is too high for the gamble of trying new artists.

Originally posted by scarredgod i love you walmart, whip the RIAA into shape. although i wont buy CDs from walmart due to them being censored, this strong arming could help change the bullcrap pricing that has been going on for years. if walmart is selling CDs for 10 bucks, the other stores will have to competively price or lose all their business. therefore walmarts plan should drop prices across the board.

i see where you're going with that but i don't see it happening for two reasons.

1. walmart does this with every supplier. if hanes wants walmart to sell their underwear their rep meets with a walmart rep to "negotiate." the negotiation amounts to the hanes rep giving a figure, the walmart rep most likely saying 'no' and in return giving a figure hanes can either take or leave. if they leave they lose the number one retailer in the world and a sizable portion of their business. with that said, just because hanes "gives" that price to walmart doesn't mean they are obligated to match that for any other retailer. its just that walmart has such a huge market share companies have no choice but to get lowballed in order to get their product into every corner of north america.

2. walmart does not stock the exact same product other stores do due to their stance on profanity and questionable content. i really don't see a consumer sacrificing the unedited version for the sake of saving a dollar.

walmart will surely win this battle. they'll get their $9.xx cds and it will have no effect on the wholesale price for the rest of the retailers.

__________________
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I can't believe that CDs generally cost retail chains $12 each. I agree with Wal-Mart. I generally won't pay more than $10 for a CD. I'll occasionally go up to $13 or a bit more for 2 disc sets. But I usually only buy CDs from Wal-Mart if it's the same CD available elsewhere(not edited) and I have a gift card that someone gave me.

Originally posted by cdollaz
This breakdown of the cost of a typical major-label release by the independent market-research firm Almighty Institute of Music Retail shows where the money goes for a new album with a list price of $15.99.

$0.80 Packaging/manufacturing
$0.90 Distribution
----------------------------------
$1.70 goes into the product itself/getting it to the public

$2.40 Marketing/promotion

$1.70 Label profit
$2.91 Label overhead
----------------------------------
$4.61 goes into the label's pocket, untied to any other part of the cd/music's creation

Still seems high to me.

i really don't see why this is so unreasonable. it costs money to produce a cd, from artists conception in their mind to the actual digital result in your cd player. to say $4.61 goes back to the label is a gross oversimplification. studio time costs money, producers paid, engineers get paid, legal fees need taken care of, and countless other costs along he way. when its all said and done, i don't see anything wrong with paying $12 for a cd.

now that they've restructured the way cds are priced (since that whole lawsuit and $11.88 revamp) i don't think consumers should feel gouged...its the artists being shorted. i feel the consumer should continue to pay current prices but the artist get a bigger take from the sale of their intellectual property.

Here's my friend's response. He boycotts Wal-Mart as it's on his most hated list.

First of all, they want distributors to sell THEM the CDs at
lower prices, not to sell EVERYONE the CDs at lower prices.
Get it?

See excerpts below for as good an argument as you'd ever
need to boycott:

>It has so much power, industry insiders say, that what it chooses to stock
>can basically determine what becomes a hit.
while checking out the music deals.

>"This wasn't framed as a gentle negotiation," says one
>label rep. "It's a line in the sand -- you don't do this, then the threat
>is this."

>As a result, all of the major labels agreed to supply some popular albums
>to Wal-Mart's $9.72 program.

Thus giving Wal-Mart an advantage no other store has.

>"If they got out of selling music, it would mean nothing to them," says
>another label executive. "This keeps me awake at night."

>Virtually no industry executives would publicly comment about their
>company's relationship with Wal-Mart.

Wal-Mart has struck fear in them.

>"I don't think there is a music supplier in America who really enjoys doing
>business with Wal-Mart," says one major-label rep.

>But as Wal-Mart and other national discount operations such as Target and
>Best Buy have grown -- approximately half of all major-label music is sold
>through these three -- an estimated 1,200 record stores have closed in the
>past two years

There go REAL record stores.

>Unlike a typical Tower store, which stocks 60,000 titles, an average
>Wal-Mart carries about 5,000 CDs. That leaves little room on the shelf for
>developing artists or independent labels.
>There's also scant space for catalog albums,

There goes freedom of choice and exposure to new artists.

>For the music industry, having such a dominant retailer is like being stuck
>in a bad marriage.

>"Wal-Mart has no long-term care for an individual artist or marketing plan,
>unlike the specialty stores, which were a real business partner," says one
>former distribution executive. "At Wal-Mart, we're a commodity and have to
>fight for shelf space like Colgate fights for shelf space."

>In the same way that Wal-Mart made it difficult for local mom-and-pop
>retailers to compete with its low prices, it has hurt smaller music stores.
>"

>In 1986, the Rev. Jimmy Swaggart led one such campaign to ban music from
>Wal-Mart, saying rock fostered "adultery, alcoholism, drug abuse,
>necrophilia, bestiality and you name it." Albums and magazines about rock
>(including Rolling Stone) were temporarily pulled from the Wal-Mart
>shelves.

If they have their way, they'll be telling everyone just what they
can and can't buy.

>Today, before any new album is released, someone at each label is charged
>with asking, "Do we have any Wal-Mart issues?" If an advisory sticker is
>placed on an album, the label will put out a clean version about ninety
>percent of the time.
>Since the edited version of a hit record usually averages only about ten
>percent of a record's total sales, they do it mostly to keep Wal-Mart
>happy.

Artistic freedom denied JUST for them.

>Wal-Mart has also urged the labels to create exclusive new products that
>would lower music prices.

There is nothing more offensive than a store having an
"exclusive," which disallows consumer choice.

your friend is exactly right. i showed this thread to a friend of mine and we got to talking about it. what the labels need to do is tell walmart to fuck off. it may have a negative effect in the short term in that they lose those sales and the ability to reach such a wide audience. but in the long term people are going to get the cds they want, whether its at walmart or somewhere else. if walmart were to stop carrying cds best buy, circuit, and target are still going to offer new releases as loss leaders to draw customers in to buy other stuff. i really hope the record companies take a hard stance on this.

wal mart is clearly facist. Having said that if they simply did a few things I would buy from them. #1 carry unedited cds. Who do they think there fooling anyways? They ARE big buisness, they probebly have tried to hide god knows what. Why act like they are morally against some things. They just want to have a monopoly on edited cds to sell to foolish country fried bumpkins who just dont believe that those singers should say those naughty words, but will still allow one of there 12 kids to buy it if its edited. Insane!!!. Just sell both. If they did this and were the best price sure Id buy from them. I occasionally do buy something here and there from them, but for the price and selection Id rather go elsewhere.
The Record buisness have the prices way to high, and Im happy that they are getting kicked around.

Just think, to collapse the economy of the US, all that would have to be done is for Wal Mart to suddenly close up shop.
This would instantly send the US into another depression.
Is that sick or what, Wal Mart holds to much sway.
Scary but true.

__________________
"I'm so sorry she made it out" - Hitler

"Although on the outside I look like a man, Inside I feel like I'm Xenu an intergalactic space being. Please don't discriminate against me... Oh, and by the way I will now require my own bathroom". - Bill...from Ohio

I find the $2.40 for marketing/promotion to be weird, or at the very least, misleading.

The $2.40 spent may not be for the marketing/promotion of THAT particular CD, but for the marketing/promotion of OTHER artists. It's a common complaint in the industry and I've heard about this time and time again.

__________________
"Knowledge is knowing a tomato is a fruit; Wisdom is not putting it in a fruit salad." -nodeerforamonth

After reading this article I said to myself that maybe this is the only way that the music industry will recognize that there's a problem.

This part I found interesting;

Quote:

Less-expensive CDs are something consumers have been demanding for years. But here's the hitch: Wal-Mart is tired of losing money on cheap CDs. It wants to keep selling them for less than $10 -- $9.72, to be exact -- but it wants the record industry to lower the prices at which it purchases them. Last winter, Wal-Mart asked the industry to supply it with choice albums -- from new releases from alternative rockers the Killers to perennial classics such as Beatles 1 -- at favorable prices. According to music-industry sources, Wal-Mart executives hinted that they could reduce Wal-Mart's CD stock and replace it with more lucrative DVDs and video games.

I've said that more than once here. There is a shift in consumer's taste happening. DVD's and video games are becoming a better entertainment value than CD's. This past month I've bought maybe 4 or 5 video games and at least 10 DVD's and ZERO CD's. Why is that? Because I don't see any CD's currently that are compelling enough to go and spend $17.99 on. At that price, why not just spend a few bucks more, or if you can get a movie or game on sale LESS, and get a movie or a game that I really like.

One thing here is different. For years it was the record industry that had the power. They determined the price and the retailers were subserviant to them. If a retailer went under the industry hardly flinched. Now the RETAILER has the power. And if Wal Mart does squeeze CD's out of thier electronics aisle, then they will be adversely affected.

I'm hoping the industry isn't that arrogant as not to concede that the winds of change are blowing. But then again they never learned in the past.

Originally posted by Captain Harlock Why is that? Because I don't see any CD's currently that are compelling enough to go and spend $17.99 on. At that price, why not just spend a few bucks more, or if you can get a movie or game on sale LESS, and get a movie or a game that I really like.

One thing here is different. For years it was the record industry that had the power. They determined the price and the retailers were subserviant to them. If a retailer went under the industry hardly flinched. Now the RETAILER has the power. And if Wal Mart does squeeze CD's out of thier electronics aisle, then they will be adversely affected.

I'm hoping the industry isn't that arrogant as not to concede that the winds of change are blowing. But then again they never learned in the past.

$17.99 for a cd? where are you shopping? FYE? Sam Goody? unless you live in the kentucky backwoods i don't see why anyone would pay more than $13-14 for a cd, and even that is at the very high end.

i disagree with you comparison between the music industry and walmart. the labels never truely had the power, as you call it, the consumer did. that was proven by the class action lawsuit filed and won over the past couple years. cds are more affordable than they've ever been. sure, the retailers couldn't get the labels to flinch but in the end it didn't matter to them, they priced the cd up a percentage and still made money or at the very least broke even. it took the consumer crying foul to make the music industry flinch whereas walmart offers products so cheaply to its consumers, said consumers don't care how they are able to sell for so little, ethics be damned. that is a dangerous situation for all walmart's suppliers, not just the music industry.

Originally posted by WestEndRiot $17.99 for a cd? where are you shopping? FYE? Sam Goody? unless you live in the kentucky backwoods i don't see why anyone would pay more than $13-14 for a cd, and even that is at the very high end.

i disagree with you comparison between the music industry and walmart. the labels never truely had the power, as you call it, the consumer did. that was proven by the class action lawsuit filed and won over the past couple years. cds are more affordable than they've ever been. sure, the retailers couldn't get the labels to flinch but in the end it didn't matter to them, they priced the cd up a percentage and still made money or at the very least broke even. it took the consumer crying foul to make the music industry flinch whereas walmart offers products so cheaply to its consumers, said consumers don't care how they are able to sell for so little, ethics be damned. that is a dangerous situation for all walmart's suppliers, not just the music industry.